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What makes a valid Pay Less Notice?

What constitutes a valid Pay Less Notice - this is something which has been the subject of debate in numerous "smash and grab" adjudications in which we have been involved.

The Technology and Construction Court (TCC) in the recent case of Surrey and Sussex Healthcare NHS Trust ("the Trust") v Logan Construction (South East) Ltd ("Logan") has now provided some clarity on this.

The Facts

Logan entered into a contract with the Trust in the form JCT Intermediate 2011 for refurbishment works at East Surrey Hospital. Practical completion ("PC") was certified on 25 August 2016.

Logan made no interim payment applications in the following months, but the Trust continued to issue Interim Certificates every two months in accordance with the payment provisions in the contract.

The Certificate of Making Good Defects was issued by the Trust on 24 August 2016. This triggered another interim payment cycle.

Final Account discussions were ongoing between the parties from June to September and a meeting was to be held on 21 September 2016, the due date for service of the Trust's Final Certificate ("FC").

On 20 September 2016, Logan emailed a spreadsheet to the Trust headed "…Account meeting 21 September". The email attached a document entitled "Interim Payment Notice" ("IPN") seeking approximately £1.1 million. There was no mention of this email being a payment notice and the Trust presumed that the spreadsheet was simply to inform discussions at the meeting the following day.

No agreement was reached on the final account and later that day the Trust proceeded to issue a FC in an amount £1.1 million less than Logan's IPN. Attached to the FC were various documents, including a breakdown of the sum stated as being payable to Logan.

The email from the Trust also referred to the IPN dated 24 August from Logan and noted that the application was out of date and void. In any event, the Trust noted that the details stated in the FC were the same as would have been stated in any interim certificate which may have been issued.

Logan disputed the sum included in the FC and referred the matter to adjudication seeking payment of the sum stated in their IPN. Logan successfully argued that the Trust's FC and covering email was not a valid Pay Less Notice and was awarded the outstanding amount of its IPN.

The Trust issued Part 8 proceedings, asking the TCC to declare that Logan's Payment Notice was invalid and that it had issued a valid Pay Less Notice.

The TCC's Decision

The Court held that:

An Interim Certificate ought to have been issued by the Trust - it was no answer to say that final account discussions were underway, which took over the need to continue to operate the interim payment process.

The attachment to Logan's email was an IPN in substance, form and intent - it was clear and free from ambiguity.

Nothing turned on the fact that the Pay Less Notice was not addressed to Logan - it was enough that it had been cc'd to it.

To constitute a valid Pay Less Notice, the notification had to specify the sum that the Trust considered to be due at the date of the notice and how this was calculated. The notice fulfilled both those requirements.

The key issue was not the substantive content of the document, but rather whether the Trust's notification was intended to constitute a Pay Less Notice. Intention was held to be "an essential requirement". That intention was to be "derived from the manner in which it would have informed the reasonable recipient".

The fact that the valuation date was not the same date as referred to in the IPN was not enough to invalidate the notice. The amount to be paid under a Pay Less Notice was to be determined at the date the notice was given.

The judge saw no difficulty in serving a contingent Pay Less Notice, i.e. it was held that it was possible to say "I consider Logan's September IPN to be invalid but if it is not, here is a Pay Less Notice."

There was no reference to "Pay Less Notice" on the Trust's notice, nevertheless the question was whether, viewed objectively, it had the requisite intention to fulfil that function. It was held that it did.

Conclusion

Against the backdrop of limited guidance or case law on the format of notices, this is an interesting case which provides useful confirmation of the standards to be applied to payer and Pay Less Notices.

Importantly, it also confirms that the practice of issuing a Pay Less Notice 'just in case' is acceptable. Indeed, this is something to be encouraged to avoid disputes and potentially significant adverse awards being made in favour of one party as a consequence of failure to serve a compliant notice.

Notwithstanding the decision, given the consequences if a valid notice is not served, best practice would still suggest that a Pay Less Notices should still state what it is on its face.